Stephen Harper, state venture capitalist

Stephen Gordon: what’s the problem the Venture Capital Action Plan is supposed to fix?

(Ryan Remiorz/CP)

To be blunt, Canadians have not spent years reducing the ownership of sectors of the economy by our own governments, only to see them bought and controlled by foreign governments instead.

Prime Minister Stephen Harper, December 7, 2012

We will provide the resources needed to put Canada’s venture capital industry on the path to sustainability and ensure Canada’s high-potential firms have the resources they need to succeed.

Prime Minister Stephen Harper, January 14, 2013

Today’s announcement of the Venture Capital Action Plan (VCAP) is a great example of a policy solution in search of a problem. In point of fact, the Prime Minister’s announcement didn’t actually explain what the problem was that the new program was to solve; that was left to the press release issued by Canada’s Venture Capital and Private Equity Association (CVCA):

[T]he domestic pool of capital allocated and available for venture capital has decreased and significantly lags the demand for venture capital, and as a result, far-reaching measures, such as those announced today, are called for

Now, I was expecting a description of some sort of market failure — an externality, or some sort of institutional quirk — that government intervention could correct, and some sort of explanation of why the VCAP could be expected to do the job. But that’s not the case. An excess demand for venture capital (VC) is not in itself a market failure.

Especially since there’s a very plausible explanation for why venture capital is in such short supply. According to this recent report from the Kauffman Foundation:

[i]ndustry returns data show that VC returns haven’t beaten the public market for most of the past decade, and the industry hasn’t returned the cash invested since 1997

So there’s a perfectly sensible market-based reason for the shortage of venture capital: VC returns are too low. In a market economy, the excess demand for venture capital would be closed by a price adjustment: entrepreneurs would be obliged to accept smaller injections of capital, would have to offer more control of their firms, or some combination of the two. But in Canada, the gap between supply and demand is closed by the government.

This is my favourite part of the press release:

The Government is currently asking potential investors to signal their interest in co-investing in new or existing funds of funds

Uh, yeah. Let’s think about this for a minute. As I noted above, an important dimension of a VC agreement is the degree of control. Let’s also assume that a government that is so averse to governments — Canadian or foreign — having an ownership stake in Canadian firms will be uncomfortable demanding a controlling interest in the new firm. What sort of investor would give their money to a VC entity that chooses to negotiate with one hand tied behind its back?

There is no obvious problem with the VC market that a price adjustment can’t solve. Throwing $400 million at the market will provide a windfall for some lucky entrepreneurs — not to mention the consultants and lobbyists hired to steer the proposals through the bureaucracy — but that’s about it.




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Stephen Harper, state venture capitalist

  1. I couldn’t have said this better myself –> “To be blunt, Canadians have not spent years reducing the ownership of sectors of the economy by our own governments, only to see them bought and controlled by foreign governments instead.”

  2. Ok, so my understanding of Venture Capital markets is less then elementary, but am I to understand that this is essentially the Canadian government putting $400 million dollars of capital (taxpayers money?) into a market that, as you stated Stephen, hasn’t been returning the investments that have been made since 1997? Again, my understanding of economics as it is leaves a lot to be desired so I’m really trying to understand what this influx of cash means.

    Thanks and all the best.

    • Yep.

      • Alrighty then. Thanks.

      • Clearly if return on investments are below “safe” investments then the bottom drops out of the VC business. However, are you actually saying that you do not believe that the benefits of investing in high-risk, high-gain activity spills over into society? Presumably that is the rational for government involvement, although doing it by an enhancement of the tax incentives would have struck me as a better approach.

        • Another factor here might be investment in university-based research which has no current foreseeable economic value and thus wouldn’t be the source of an investment in the private market. One could say “if we’re going to put money into high risk ventures unlikely to pan out, why not just put the money into research that nobody is suggesting be funded privately, but which adds to the public store of knowledge and someday might be leveraged into a valuable product by others.”

          • And or (as thwim suggests) invest in a near certainty like infrastructure and leave business to figure how to manage risk.

          • There’s a place for that certainly. I only bring up universtiy based science research becasuse it seemed to have more in line with VC investing – cutting edge stuff with little immediate rate of return unless you get super lucky.

          • University science research is nothing like the stuff that VCs fund. University science research largely ends at producing the patent. That tends to be where VC work begins.

          • ‘xactly.

    • Project propose intelligently, Canada Investment Bank or so, start your Company, go get C$1M, re-invest in GIC or TFSA or Diamonds. Boom, Bob is your uncle.

  3. As an aside, would it also not be wrong to call this corporate welfare? Our corporations in this country are already pretty flush with investment capital. I don’t think they need more.

  4. We’ve got a country to build and Canadians are famously gun shy about risk. In the U.S. some dude in a hoodie can build a billion dollar Facebook and he’s got people lining up to get in early on it.

    Would that happen here?

    No.

    We’ve gone from being pioneers and homesteaders to a nation of people who fill their TFSA’s with GIC’s, if they bother to do any saving at all.

    This initiative is a good step in trying to facilitate investment and entrepreneurial initiative.

    Of course…it’s lead by government so it’ll probably fail.

    • So people can’t do it and govt can’t do it?

      I guess we wait for aliens then

      • Would that be you?

        • Well some people have this idea that businessmen live for ‘risk’. A swashbuckling ‘Captain of Industry’ that’s keen to bust balls and ‘build a nation, by Gawd!’

          When of course most people want a safe life, a secure job, and a weekend at the lake if possible

          So Canadians have always built up a business…and then sold out to the Americans and retired. Harper still believes in the swashbuckling….even though he’s never done any himself. And he and Flaherty are stunned that we are not a nation of swashbucklers, generally speaking.

          So, now they know why govt has been doing it….only way it gets done, and even then it’s not a sure thing….Nortel for example

          But if neither Canadians nor govt do it….we’re screwed.

  5. This new government program has nothing to do with making venture capital available to the marketplace. Remember that the Harperites are famously against any government intervention in free enterprise. This is simply a slush fund that the Harper government will use to reward its corporate buddies. Since Harperites believe that no government participation in business can possibly be productive or successful, they will make sure their beliefs are adhered to; all ventures they enter in to will be failures.

  6. “So there’s a perfectly sensible market-based reason for the shortage of venture capital: VC returns are too low.”

    Kind of like how there was a perfectly sensible market-based reason for the shortage of liquidity in the financial crisis. Nobody wanted to lend money because they were scared they wouldn’t get it back. Would you argue that the government should have done nothing since it is basically the same problem (a lack of faith in the future based of past results)?

    “What sort of investor would give their money to a VC entity that chooses to negotiate with one hand tied behind its back?”

    If an investor knows that the government is effectively a silent partner then they could get majority control of a company without actually having to own a majority of it. Sounds like a pretty good deal to me.

  7. With this the Conservatives have abandoned any claim they’ve ever had to being responsible stewards of the public purse — so what can they now claim as a reason to re-elect them?

    • investing in new business is great for the economy… its great use of the public purse

      • Investing in a new business that the private equity market doesn’t believe is viable is a “great use of the public purse”??

        I thought Steve was a believer in the private sector — and definitely NOT a fan of inefficient-by-definition government involvement –

        • the key here is venture capital. If your policy is to create jobs, whats the best way to do it? the government is not involved. the government is investing in private vc funds as a market maker to help encourage vc fund mangers to go out further on their risk curve. the government is not involved… there is no beauracrat controlling which venture to enter. Ottawa has a very good chance of seeing real return over a longer term investment horizon. the financial crisis shortened the risk appetite for private capital due to market uncertainties. Investing in vc is much safer than outright spending of taxpayer money. key take away – fed is not involved. its just serving as a market maker for vc managers to increase their risk appetite.

          • So we want them to go further out on a risk curve, when the reason they’re not out that far already is that the returns don’t justify it.

            Essentially saying, “We know you have more productive ways to invest your money, but we’d really like it if you wasted some of ours..”

            This makes sense to you?

            The best way to create jobs is to.. well.. create jobs.
            It’s not like this country has more infrastructure than it needs already.

          • no its because you can make better returns on a shorter time horizon with equities and reits and bonds. If i ran a Fund and I could make $5 dollars tomorrow or $10 next year, i would take the $5 tomorrow. This doesnt mean vc is throwing money away, it just means the market place has no appetite for longer term alternative, illiquid investments. They seek more liquid and shorter term investments oportunities. i dont even know im on this rag of a site debating how jobs are created with people that dont seem interested in sharing insight

          • Oh I’m interested in sharing insight, but that would require you have some to begin with. Your comment indicates otherwise.

            Consider what you’ve said: “the market place has no appetite for longer term alternative, illiquid investments” and “the government is not involved”.

            And yet somehow, you think the government giving away our tax dollars, without being involved, is going to change things to create jobs.

          • Harper voodo economic theory.

          • I guess that $ 400 mil SG referenced is just CT money then? Your post reads like a bureaucrats wet dream. Business won’t take the risk with its own money – solution, let the TP underwrite the risk for them.

          • the government is not involved. the government is investing in private vc funds as a market maker to help encourage vc fund mangers to go out further on their risk curve. the government is not involved…

            Well, that ought to work well. If there’s one thing we’ve learned it’s that when the government gives money to private enterprises with no strings attached the private sector gets right to work using the money the way the government hoped they would.

          • Actually, the string is that you actually have to invest your risk capital to get access to the the government’s money. It’s a sidecar fund. This is hardly like the government cutting corporate taxes and saying corporations would create all these super-awesome jobs. Anyone who argued that is clearly crazy, right?

  8. Even Bob Rae – noted socialist to his right wing enemies – limited his intervention in venture capital (onatrio’s labour sponsored venture capital funds) to favourable tax treatment.

  9. John Stuart Mill ~ I never meant to say that the Conservatives are generally stupid. I meant to say that stupid people are generally Conservative. I believe that is so obviously and universally admitted a principle that I hardly think any gentleman will deny it.

  10. This comment was deleted.

    • So you’re suggesting our government is investing in Cirque du Soleil and their contortionists?

      Well why didn’t they just say so? Hell, I’ll support that.

      • It’s got TCs fingerprints all over it. Surprised it didn’t try to list gazebos in Muskoka as a pre condition.

        • Did you delete your initial comment? Or is that the not-so-invisible hand of Maclean’s operating again?

          • Nope. If its gone they did it. Pathetic isn’t it!

  11. The fact that Macleans deleted a semi humourous mocking comment referencing Tony Clement is frankly bizarre, given all the borderline and outright racist comments you’ve given a pass here lately that mocked chief Spence or FN’s. Not that I approve of censoring anything less than a obviously vile personal slur. My comment was not directed at SG. I can’t imagine any reason for censoring it at all. But I have noticed that whoever polices SG’s blog has an itchy trigger finger. It’s your blog, nevertheless it’s disappointing.

  12. Any old idiot can grow a brain, but Harper has something they haven’t got. A diploma… Which somehow qualifies him for what? Every ‘economic’ decision he has taken has been late, wrong, or counter-productive. Thank goodness his ilk had not had time to do more harm before the catastrophe of ’08. Thank goodness for minority governments.

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